Oil falls more than 3% as concerns about Mideast supply ease

By Erwin Seba

HOUSTON (Reuters) -Oil slipped more than 3% on Monday as fears eased that the Israel-Hamas war would disrupt supply from the region, and as investors grew cautious ahead of this week's U.S. Federal Reserve meeting.

Brent crude futures settled at $87.45 a barrel, down $3.03, or 3.35%, while U.S. West Texas Intermediate crude finished at $82.31 a barrel, down $3.23, or 3.78%.

"The main feature here has been the market reacting to events between Israel and Hamas," said Jim Ritterbusch, president of Ritterbusch & Associates.

"Macroeconomic factors could easily emerge later this week, when we'll see if the Fed has something to say."

Crude jumped 3% on Friday after Israel stepped up ground incursions into Gaza, stoking worries the conflict could expand in a region that accounts for a third of global oil output. However, that concern was fading on Monday, analysts said.

"The war premium has come out of the market," said Phil Flynn, analyst at Price Futures Group. "It's a situation where over the weekend the war seemed to intensify, but there seems to be no disruption to supply."

Israeli troops and tanks attacked Gaza's main northern city from the east and west on Monday, three days after it began ground operations in the Palestinian enclave.

"There is a propensity for market users in all their guises to have at least some oil length going into the weekends, and when the fear of conflict spread shows no validation... that fear hedge is ordinarily unwound," said John Evans of oil broker PVM.

Investors are also focused on the outcome of Wednesday's Federal Reserve meeting, as well as on what earnings from the likes of tech giant Apple Inc might indicate regarding the prospects for an economic slowdown.

The Fed is widely expected to keep interest rates unchanged, while the central banks of Britain and Japan are also set to review their policies this week.

Meanwhile German inflation eased in October, pointing to a substantial cooling in headline inflation in the euro zone.

China reports its October manufacturing and services PMIs this week, with investors looking out for more signs that the economy of the world's top crude importer is stabilising.

On Monday the World Bank said it expected global oil prices to average $90 a barrel in the fourth quarter and $81 in 2023 as slowing growth eases demand, but warned that an escalation of the Middle East conflict could spike prices significantly higher.

(Reporting by Erwin Seba; Additional reporting by Alex Lawler Natalie Grover, Mohi Narayan and Florence Tan; Editing by Jason Neely, Jonathan Oatis and Jan Harvey)